A Socialist Market Economy With Chinese Contradictions

LONDON – The year 2016 ends with slightly higher forecasts for global growth and inflation. In part, that reflects expectations of a big new fiscal stimulus in the United States under President Donald Trump. But equally important is the strength of the Chinese economy, with buoyant industrial production fueling a sharp rise in global commodity prices.

That strength has confounded expectations that China’s seven-year credit boom, during which the debt/GDP ratio rose from 150% to 250%, would inevitably end in 2016. Some Western investors foresaw a banking crisis, owing to enormous bad debts; others expected that President Xi Jinping, having consolidated his political position, would introduce structural economic reforms. But almost all non-Chinese economists anticipated a significant slowdown, which would intensify deflationary pressures worldwide.

In fact, the opposite has happened. Central and local government borrowing in China has soared: bank and shadow-bank credit has grown rapidly: and the People’s Bank of China (PBOC) has increasingly issued direct loans to state-owned banks in a maneuver closely resembling monetary finance of government spending.

These policies, moreover, are increasingly justified by assertions that China has policy options not available in Western economies. In an article in July, Sheng Songcheng, the PBOC’s head of statistics, argued that “the macro framework in a socialist market economy is superior to the Western economy,” because “the Chinese government has significant power in terms of both monetary and fiscal policy and is able to seek the optimal combination.”